Paradise Lost?

The recent leaking of the documents known as the Paradise Papers was a very important event for the media. It filled papers and occupied web space during a slow news period. That must have been the reason for the disclosure as everything else about it seemed very mundane.

It certainly doesn’t rank as news that people who are vastly wealthy employ other people to arrange their tax affairs in a way that is advantageous. And when all the details emerged, it was abundantly clear that no-one was breaking the law. There is, of course, the moral question, but that is much more difficult to deal with.

The point is that if you have a system of rules that have not been drafted correctly and loopholes have been left, why be surprised when someone looks to exploit them? Many accountants and lawyers run businesses predicated solely on the existence of such loopholes.

The indignation felt by many people over the Paradise Papers was not so much about the wealthy doing what everyone thought they did anyway, it was more that a system exists for most that requires payment of taxes and there is little or no leeway to get out of it.

PAYE is all encompassing for employees and companies have strict accounting procedures that regularise tax returns and payment of amounts due. So, the vast majority of the population pay tax without thinking.

But is that really the case? Is there no mechanism that allows us to at least mitigate tax?

The answer (fortunately for the purpose of this blog) is that, all too often, we pay tax without thinking and we ignore ways to reduce our tax bill.

How many employees in pension schemes only pay the required contribution i.e. the figure set out in their pension scheme’s explanatory documents, rather than paying the amount they can realistically afford (and, more likely, the amount needed to give them the best chance of getting the retirement income they really want)?

And how many people who receive a bonus from their employer, take it, pay higher rate tax and National Insurance, and then put the net amount in a deposit account paying little or no interest for some unspecified future use, rather than put it into their pension safe in the knowledge that they are extremely unlikely to ever pay more than basic rate tax when they come to take it out?

That’s not even mentioning those higher rate taxpayers who fail to reclaim their higher rate tax relief from HMRC (see my previous blog on this matter).

And companies far too regularly pay the Corporation Tax their accountants tell them is due, rather than thinking about making pension contributions for Directors that could potentially eliminate their tax bill entirely.

All this takes is a bit of planning shortly before the end of the company’s financial year to assess the likely amount of tax due and money available to pay into pensions (it seems strange how, in many cases, there is always money there to pay the tax but rarely is there money to pay a pension contribution).

And none of the above reflects the unclaimed allowances (uniforms and tools, for example, needed for work that can be claimed against tax), Personal Savings Allowance, Dividend Allowance, Inheritance Tax allowances, VCTs, EISs, SEISs etc. etc. that can be used but, by and large, aren’t.

The problem overall is that many believe tax is compulsory and there is nothing they can do about it. Many people and many companies, however, pay tax they don’t need to simply because they have failed to look at their options.

So, when you hear about the (inevitable) next story about how the wealthy avoid tax, why not think about what you could be doing to minimise your bill? Or, better still, don’t wait and do something about it now.

“A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform.”
– Russell B Long


Peter Murphy Dip PFS


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